Bernanke: Now The Administration Owns The Mess


Bernanke: Now The Administration Owns The Mess

Posted by Karl Denninger

So we got our “Bernanke” reconfirmation on two votes, the first the “real” one and the second the one that everyone is trying to “count.”

Let’s first look at the real vote – the vote for Cloture, without which there would have been no confirmation vote at all.

The following Senators voted YEA on Cloture and stand for election this November.

AK:Murkowski (R)
AR:Lincoln (D)
CA:Boxer (D)
CT:Dodd (D)
GA:Isakson (R)
HI:Inouye (D)
IN:Bayh (D)
MD:Mikulski (D)
NC:Burr (R) YEA
ND:Dorgan (D) YEA
NH:Gregg (R) YEA (Retiring – to a Goldman affiliate!)
NV:Reid (D) YEA
NY:Schumer (D) YEA (Wall Street’s Chief Whore)
OK:Coburn (R) YEA
OR:Wyden (D) YEA
UT:Bennett (R) YEA
VT:Leahy (D) YEA
WA:Murray (D) YEA

Ignore the actual confirmation vote.  Some of the clowns in the Senate, like Babs Boxer, tried to obfuscate reality by voting for Cloture and then voting “Nay” on the final vote itself, in an attempt to play “I voted against it before I voted for it.”  This sort of symbolic malarkey must not be allowed to stand.

More importantly though is that Bernanke is now officially President Obama’s child.  He put him up for renomination, he did not pull that nomination, and he personally lobbied for his reconfirmation.  He owns it.

There are many who believe that Bernanke “saved us from another Depression.”  I will note that there were many in 1930 who thought we had been “saved” as well.  They were wrong.

They were wrong for the same reason they’re wrong this time.  From SIGTARP’s latest report:

It is hard to see how any of the fundamental problems in the system have been addressed to date.

  • To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.

  • To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.

  • To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.

  • To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.


That report is 224 pages, and ought to be required reading.  But the executive summary above that I have excerpted is the base of it all.

There is one place that I disagree with Barofsky – that is the “reinflation” of the housing bubble.  That’s simply not going to happen, because the bubble itself was (as are all bubbles) predicated on false credit quality claims. 

Bubbles all depend on credulity.  That is, they rely on the ability to find more and more suckers upon which one can offload over-rated securities, each of which is worth less than claimed (and in some cases literally “worthless”!)  They pop when the number of suckers is exhausted and the mad scramble for chairs begins as the music suddenly stops.  Those left holding a bag with no sucker to offload it to go bankrupt and since the essence of bubble economics is the overuse of leverage the bagholders inevitably are geared and those who lent them their money are imperiled as well.

The natural check and balance on such behavior is the risk of bankruptcy.  That fear prompts underwriting and proper margin supervision, thereby limiting the impact to those who actually speculated.

But we have failed on two accounts: We first allowed regulated banks and insurance companies to speculate, effectively allowing private parties to gamble with the credit of The United States, where they keep the winnings but pass on the losses to the taxpayer.  Then, when the bust came, instead of punishing those who gambled and lost by forcing them through bankruptcy (even if it meant the taxpayer would take a huge hit) we instead took the hit but left those who did the evil things with operating businesses!

Bernanke is one of the chief architects of this structure.  He has repeatedly engaged in “bubble economics” with scant regard for the common taxpayer – the citizens of this nation.  Instead, his focus is on the few thousand brigands found in New York, who are plundering our society to the limit of their ability.

The last two weeks have treated us to a few ugly realities in regard to where the markets are and what Bernanke has done.  By pumping a literal trillion dollars into the markets via his above-market-price purchase of mortgage and treasury securities along with a zero interest rate for short-term fed borrowing he has engendered a monstrous stock market bubble.  This has come about due to the inherent disconnect between real valuations and yields in markets where he has interfered (when you overpay for something you drive its yield down.) 

But that stock bubble has in turn been predicated on growth numbers that simply cannot arrive in the real world.  The realization that “we’ve been had” may be coming now – but whether it is now, a month from now or six months from now, it will come, and instead of producing a flattening of the market (which would be the likely outcome were we trading in the 800s or even low 900s now on the S&P) the potential for an outright crash instead exists as people run for the door.

We should know better – after all, the same dynamic took hold in the housing market.  But that sort of dynamic was ignored then (“subprime is contained”) and is being ignored now (“I don’t see any asset bubbles”) by Bernanke, and will continue to be – right up until the market implodes.

Perhaps this is his (and President Obama’s) intent.  After all, our dear President intends to send a nearly $4 trillion Federal Budget to Congress in the coming days, while we are running a deficit of nearly half that.  With China increasingly unwilling (or unable) to continue to recycle hundreds of billions annually back to US Debt (a losing strategy for them in the longer term as they’ll never be paid off) and both Japan and England drowning under their own debt issuance one has to wonder exactly where Obama and Bernanke think they can source the over $1.5 trillion in net issuance they need to continue the charade.

Perhaps the answer is nothing more complex than intentionally cranking the stock market one more time, then crashing it again, scaring everyone into Treasuries.  Recent changes in money-market fund rules to permit them to throw up gates without prior approval of the SEC may be part of this, as may the rumblings about “annuitizing” people’s retirement accounts.  Anyone care to take a bet on there being some sort of “conversion to something safe” option being thrown about if and when the stock market dives once more?

In any event the key items here are that we now have a “hit list” of Senators that must go from their seats come November, and a reminder that President Obama can no longer blame what I believe is an upcoming collapse of the stock market – a multi-year affair that will be much worse than what we suffered in 2008 and early 2009 – on President Bush.  He had the opportunity to name either Volcker or John Taylor (to name two) to the position that Bernanke has, and decided instead to go with the guy who has been a chief architect of the “Brigand-and-Loot-Em” society – for better or worse, it’s all his now.

Bonne chance mes amis.